Axalta Coating Systems Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the exhaustive second quarter 2020 earnings conference call. All participants will be in a listen-only mode. A question and answer session will follow the presentation by management. Today's call is being recorded and replays will be available through August 4th. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore may no longer be current. I will now turn the call over to Chris McRae. Please go ahead, sir.

Thank you and good morning. This is Chris McRae, VP of Investor Relations. We appreciate your continued interest in Exalta and welcome you to our second quarter of 2020 financial results conference call. Joining me today are Robert Bryant, CEO, and Sean Lannan, CFO. This morning we released our quarterly financial results and posted a slide presentation along with commentary to the investor relations section of our website at exalta.com, which we'll be referencing during this call. Both our prepared remarks and discussion today may contain forward-looking statements reflecting the company's current view of future events and the potential effect on Exalta's operating and financial performance, including those related to the impact of COVID-19 and our actions in response, as well as our restructuring efforts. These statements involve uncertainties and risks, and actual results may differ materially from those forward-looking statements. Please note that the company is under no obligation to provide updates to those forward-looking statements. This presentation also contains various non-GAAP financial measures In the appendix, we've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information regarding forward-looking statements and non-GAAP financial measures, please refer to our filings with the SEC. I will now turn the call over to Robin. Good morning.

Thank you for joining us for our second quarter earnings review. Today, we will provide an update on our quarterly results, the impact of COVID-19 on Exalta's operations, and the continued actions we're taking in response, including the launch of a global restructuring initiative. A more detailed review of the quarter has been published to our website along with our presentation, and we will keep our remarks brief today as a result. Before we begin, I do want to wish everyone good health, as health and safety remain top of mind for us at Exalta. We continue to focus daily on ensuring that we maintain safe operations globally for the benefit of our employees, customers, suppliers, and the communities in which we operate. We commented in detail on this during the quarter, but I also want to emphasize that we operate every day at Exalta with a commitment to diversity, equality, and inclusion in the way we treat all employees, customers, and partners. Shifting now to our second quarter results and highlights, we continue to navigate this challenging pandemic period based on the three guiding principles that we shared in our May update, which include maintaining employee safety and well-being, maintaining operating flexibility, and maintaining financial flexibility. I believe you will see that we have been well served by focusing on these three areas. We were very pleased to see a significant net sales recovery within the quarter, following the bottom set in April. In June, we saw a recovery to down 24% and overall constant currency net sales from prior year levels and 82% higher than the low point we saw in April. This came on the heels of gradually resumed automotive production in the back half of the quarter, a sequential recovery in miles driven globally, some improvement in broader industrial production through the period, and improved housing market metrics supporting our industrial wood and coil coatings businesses. Total net sales for the quarter decreased 39.7% before FX and M&A impacts. Performance coding second quarter net sales decreased 32.3% on a constant currency organic basis, with refinish decreasing 38.7% and industrial decreasing 23.2%. Transportation coding net sales XFX decreased 53.7% year over year in the quarter, with light vehicle decreasing 54.9% and commercial vehicle decreasing 50.1%. Consolidated adjusted EBIT for the quarter was a loss of $12 million, clearly reflecting the extreme volume pressure in the period. Performance coatings adjusted EBIT of $2 million was significantly pressured by the detrimental effects of lower volume, lower average price mix, and FX pressures. Transportation Coding's adjusted EBIT loss of $39 million also included clear volume drop-through effects. Exalta's adjusted EBIT results also included the unfavorable impact of accounting charges in the period related to COVID-19, primarily associated with underutilized manufacturing sites, which totaled $45 million. Excluding these charges are adjusted EBIT and our adjusted EBITDA would have been closer to $33 million and $90 million, respectively. With demand sequentially improving through the quarter, along with utilization picking up at our sites globally, it was encouraging to see results return to profitability in the month of June after two challenging months to start the quarter. Xalta's balance sheet remains in great shape. notwithstanding the increase in our reported net leverage ratio due to the impact on the profit denominator in the second quarter. With the execution of the 4.75% coupon 500 million senior notes in June, along with the actions we've taken to conserve cash, our liquidity position remains extremely strong. In response to the demand impact of the global coronavirus pandemic, today we announced the initiation of a global organizational restructuring. The initial action is expected to generate annualized savings of approximately $15 million once fully implemented. Additionally, we're actively planning incremental steps to further reduce our cost structure and increase our speed and agility to market. These may include, in the near term, further headcount reductions in Europe, pending consultations with work councils and other local legal requirements, and other potential changes to streamline and improve the business globally. We're now moving forward to position Exalta for profitable growth across our served markets, especially in higher growth segments of the coatings market. Turning to the overall demand environment, Exalta benefited from sequential recovery following the volume bottom set in April. In refinish, total miles driven and accident rate volumes globally continue to be impacted materially by stay-at-home restrictions, but the magnitude has moderated over the last several months. In the bottom set in April, with traffic down 45 to 50% in the U.S., we have seen traffic rebound solidly and close the gap with pre-COVID levels by early June. That being said, comparisons against prior year traffic remain challenged. Approximately 15 to 20% below prior year levels on a seasonally adjusted basis as of the end of June. In Europe, traffic levels have remained highly variable between countries, but we've seen broad recovery since April to levels exceeding the pre-COVID baseline of traffic levels in mid-January. In China, once mobility restrictions were lifted in March, traffic resumed to nearly normal levels within weeks. This appears to be the fastest and most robust level of recovery we've tracked of the most populous countries. Exalta's total China net sales in June were up 4% from the prior year. Our body shop customers in the US and Europe have seen activity in the range of roughly 80% of prior year toward the end of the quarter, a substantial recovery from the end of the first quarter where demand was trending at approximately 60% of the prior year. In our industrial end market, Exalta's second quarter results continue to show more resilience overall relative to our other businesses, given the wide dispersion of global customers and markets served, as well as ongoing new account additions we've seen this year. During the second quarter, while each of the industrial sub-businesses saw significant impact from lower volumes, the bulk of that impact occurred during April and May, while June saw significant recovery in volumes from the lows. In some sub-businesses, we saw full recovery to around even with prior year net sales levels, including wood and coil coatings. At the end market level, while lower automotive production has impacted e-coat customers and general industrial customers that sell into automotive tier suppliers, other markets, including building and construction and agriculture, have recovered to operating rates above prior year levels, notably in North America. In our transportation coding segment, most global automotive and truck OEMs temporarily halted production for a portion of the second quarter, impacting April most severely, but continuing through the quarter as initial restarts began in mid-May. Exalta generally expects to track the recovery rate of the global vehicle markets, and this has been the case in recent weeks. In China, we've seen significant production recovery across all vehicle markets. Customer production sites began to reopen in early March, and second quarter production even exceeded prior year levels in certain weeks. Passenger vehicle retail sales in China have rebounded fully from the COVID-19 impacts, with total sales up 1.8% in June versus the prior year. China light vehicle net sales volumes for Exalta increased in June by healthy double digit levels versus the prior year. For the U.S. automotive sector, Aggressive incentives coupled with low financing rates continue to bolster early recovery with demand stimulation. Signs of this recovery have been seen in automotive sales during June, which recovered to 13.1 million units are up from a 12.3 million level in May. For the quarter, global light vehicle production declined 45%, including a 23% decrease in Asia Pacific and a 9% increase in China. Current industry forecasts call for a 22% drop in global builds for the full year, including a decrease of 11% for the third quarter. It's worth noting that forecasts have improved in each of the last two months. Overall, global truck production decreased 33% in the second quarter, and current forecasts for Class IV to VIII truck production suggest a 25% decline for the year, with third quarter down 20%. The overall truck market also appears to be firming slightly. And recent production estimates by industry forecasters have increased in the last month due to stronger than expected orders, notably in the Class 8 vehicle segment in North America. With that, I'll turn it over to Sean for some additional details.